Most children are not lucky enough to have a college savings when it comes time to apply to a school and decide where to spend the next four years while seeking a higher education. This is proven by taking a look at the growing amount of student loan debt in the United States, but this is not the case in every situation. If your kids are fortunate enough to have a college savings account, you might be wondering how to manage that money and if it is acceptable to draw on it early. While early withdrawals are allowed under most plans, there are consequences to taking money out of a college account before actually going to college.
If you are short on funds and considering tapping into your kids’ college savings to pay the bills, here are some things to know:
- Any withdrawal not used for the purpose of the account is considered taxable income. This means you will receive a tax form at the end of the year, and have to pay taxes on the amount of money taken out for a non-college related expense.
- On top of potential tax liability, you can also face payment of a penalty for withdrawing from a college savings account and using the funds to pay household bills.
- The money you take out should ideally be redeposited in the same fiscal year. Doing so will not only keep your kids’ account at the same level, but it will also help the fund grow and provide you the tax benefit of making the deposit. This depends on the type of account, but many plans provide for at least a state related tax break for certain types of college savings plans.
If you are in such dire straits financially that you need to tap into your child’s college savings, it might be better for you to file a bankruptcy case. Bankruptcy is a legal way to eliminate or reduce debt, and it does not have the tax consequences associated with early college savings withdrawal. You will qualify for either a Chapter 7 or a Chapter 13 case, depending on your income and debt situation, and we will let you know which type of case you are eligible to file. Let us help you get out of debt, by calling our office today to discuss your options.
For more information about how to manage debt, contact us at www.DsouzaLegalGroup.com. We will help by coming up with solutions that work for you.